Comparing Bitcoin’s Lightning Network to legacy credit card processing shows that Lightning settles payments more efficiently and affordably.
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The traditional use of the Bitcoin network for cross-chain settlement is very efficient by settling transactions approximately every 10 minutes. Bitcoin may be more closely related to Fedwire Funds which only settles about 200 million transactions per year than Bitcoin’s one-year figure of 98.5 million transactions.
As it stands today, the Bitcoin network is on track to settle $3.5 trillion worth of change-adjusted value over the course of 2023, at costs of just $198 million, with a fee rate equivalent to 0.006% for the average transaction. While average transaction costs are obviously wobbled by the largest transfers in the dataset, we can look at the average transaction settlement value and calculate the average transaction fee, and we still see that cross-chain bitcoin transactions are a very efficient way to send and Get value in an unreliable way online.
Despite Bitcoin’s extreme efficiencies as an immutable global settlement network, it remained not ideal for minuscule, instantaneous transfers, with the 10-minute block interval goal adding latency for transaction settlement. This is fine for large sums of money, as evidenced by the current financial system, where the net settlement of funds between financial intermediaries is often not finalized for days or weeks on end – I think MasterCard or Visa settle their books on a net basis with a bank institution such as JPMorgan.
However, there is still a need for good online money that can be settled instantly with almost no cost. With the advent of the Lightning Network, the latency associated with sending a Bitcoin transaction has disappeared, especially for micro-payment settlements. This has led to an entirely new use case for bitcoin, as the fiat medium now finds itself included in tech stacks of web applications and services around the world.
As a refresher and overly simplistic description, the Lightning Network is powered by node-runners making on-chain transactions to open payment channels with other nodes. This adds fluidity to the network and creates a network of channels when enough users open channels to each other. Lightning payments are sent from one node and hop through other nodes that have enough liquidity in their channels for the payment to reach its intended destination.
By making a single on-chain payment to open a channel, funds on the Lightning Network can move with minimal friction and stability without waiting for 10-minute periods between blocks for each transaction, until the channel is closed by another on-chain transaction. These channels allow for lower fees because payments are only paid to jump through nodes that have liquidity in their channels.
With revitalization tech out of the way, let’s take a look at Bitcoin settlement pool costs compared to existing retail settlement options like credit cards and focus on the massive efficiency gains of the Lightning Network in particular. As described below, we compare the upper and lower bound costs of legacy payment processors to the average settlement cost of an on-chain Bitcoin transaction — the average fee paid divided by the average transaction size — and the ratio of Lightning’s average fee to send the equivalent of 1 Bitcoin.
We acknowledge that the comparison between the average cost of an on-chain Bitcoin transaction and the costs of legacy payment processing is not quite so comparable since credit card processors allow for almost instantaneous (but not settled!) payments. However, this is where the massive efficiencies of the Lightning Network come into play.
The same graph above is also shown below, in logarithmic scale, in order to provide a more representative visual.
The two charts above show how much more expensive the Lightning Network is to settle payments compared to credit card processors.
Yes, legacy payment processors facilitate the transfer of trillions of dollars annually, which dwarfs the settlement size of the Lightning Network. As a side note, Lightning transfer size cannot be quantified as it is with on-chain transactions. Given the Lightning Network’s relative size, it’s essential to remember that the network has continued to grow exponentially, while facilitating instant transmission at near-zero cost, all as connectivity becomes ever more intense.
In addition to cheaper settlement, the Lightning Network also facilitates payments 60,000% to 140,000% more efficiently than credit cards.
While it might be somewhat of a stretch to directly compare average Quick Pay fees to those of a multinational credit card processor, especially given the extremely small payments for many Lightning transactions, the nature of public Lightning channels and transactions means that these The technology is very capable of scaling to accommodate much larger transactions if/when needed. There is already indirect evidence of this happening with average public channel volume rising to all-time highs in BTC and USD terms at the time of writing.
Much of our focus lately has been on the economic opportunities for bitcoin in terms of the total market for stocks, bonds, and other addressable stores of value, but we find the current development and growth of the Lightning Network very compelling.
The Lightning Network has a thriving and ever-growing ecosystem, integrating micropayments into paywalled media content, value-for-value platforms, crowdfunding opportunities, and social media tips (hello our), bitcoin derivatives markets such as LN Markets (which is seeing trading volumes at all-time highs) and more.
Final note:
First enabled by a Segwit soft fork in 2017, the Lightning Network has gone from a conceptual idea to a thriving global ecosystem in less than six years. Reminiscent of the early days of the Internet, lighting and user engagement network nodes have moved from developers of specialized high-tech software to the brink of mainstream adoption in a short period of time.
While the Lightning Network may not be major news, the technology enabled by Lightning – the ability to digitally route a bearer asset in a trustless manner over the Internet at virtually no cost – is a very important development in the history of payment networks, and it’s the first to do so. It in an open and decentralized way.
We are very optimistic about the continued development and adoption of the Lightning Network, and believe that the advent of a common open standard to instantly send and receive native internet value at very low costs could be the killer app that brings bitcoin to a billion people.
It is helpful to compare the early days of the internet to what bitcoin was in its life cycle. Looking at the growth of the two networks below can give us a small glimpse of where Bitcoin and Lightning might be heading as adoption increases.
How did the Internet begin:
How are you:
How the Lightning Network got started:
How are you:
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